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CEOs’ planned transactions are being driven by several factors, according to the October 2022 EY US CEO Outlook Survey (PDF), including investing in early stage or adjacent businesses, acquiring a business in an adjacent sector to create new growth avenues, and making a transformative deal to shift to a new business model and customer base.
As companies consider these acquisitions, it might seem intuitive to estimate the related M&A integration costs based solely on the deal size. But our extensive experience and research into reported one-time costs in 229 transactions¹ reveal that expenditures are much more indicative of the degree of change required in the integration plan rather than the sheer transaction size.
Put another way, change — to the current operating model, technology, workforce, infrastructure and other aspects of a business — is the key driver of M&A integration costs, as exemplified in four challenges, outlined below.
1. Synergies represent the most direct correlation with M&A integration costs.
The best measurement of the degree of required change in the integration plan is the size of the targeted synergy and capturing M&A synergies across the business. Typically, the more that an operating model redesign or change is desired, the more spending will be needed — at least in the near term. Rebooting IT, reducing the number of employees, shutting down a central office, rebranding the company or consolidating the supply chain all result in significant costs.
It is logical then that the larger the targeted synergy, the greater the change needed and the more it costs to get there.